iring a contractor feels like the simple option. No payroll, no employment rights, no long-term commitment, just an invoice and a working relationship you can end when the project does. For a lot of that, the instinct is right. The place it goes wrong is a set of tax rules called IR35, and IR35 is one of those areas where a reasonable, well-meaning founder can create a real liability without noticing.
What IR35 is about
IR35 exists to catch what HMRC calls disguised employment. The concern is a person who works, to all intents and purposes, like an employee, but bills through their own limited company to get the tax treatment of a contractor. If the working relationship looks like employment, HMRC's view is that it should be taxed like employment, regardless of what the contract calls it.
The pitfalls that catch companies out
- 01
Assuming the label settles it
Writing “contractor” at the top of an agreement does not make someone a contractor if the day-to-day reality is employment. HMRC looks at the substance, not the heading.
- 02
Misreading the tests
The analysis turns on the whole working relationship. Relevant factors include control over how and when the work is done, whether the individual must provide the services personally, and the other practical features of the engagement.
- 03
Not knowing where the liability lands
Where the off-payroll rules apply, the client may be responsible for the status assessment and for operating PAYE. Small private-sector clients are generally outside those rules, in which case the contractor’s intermediary remains responsible.
The written contract matters, but it cannot override the reality.
The other thing to sort while you’re at it
There is a separate trap next to IR35 that has nothing to do with tax: intellectual property. Unlike an employee, a contractor does not automatically hand the company the rights to what they create. Without a written assignment, the code, designs or content you paid a contractor to build may not actually belong to you, which is a problem that surfaces later, expensively, at diligence. If you are engaging contractors, fix the IP assignment in the same contract that addresses the status question.
The takeaway
Contractors are a perfectly good way to build a company. They just need a contract that reflects the real relationship and captures the IP. Getting that contract right is quick to do at the start and painful to fix afterwards, and it is the kind of thing we set up as a reusable template so you are covered every time.